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In re Penn Central Transportation Co.

July 16, 1975

IN THE MATTER OF PENN CENTRAL TRANSPORTATION COMPANY, DEBTOR, IRVING DOMNITCH AND HAROLD DOMNITCH, APPELLANTS
v.
THE BANK OF NEW JERSEY AS INDENTURE TRUSTEE UNDER A MORTGAGE OF THE NEW YORK CONNECTING RAILROAD CO. AND GEORGE P. BAKER, RICHARD C. BOND AND ROBERT W. BLANCHETTE AS TRUSTEES, APPELLEES



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA D.C. Bankruptcy No. 70-347.

Seitz, Chief Judge, Rosenn and Weis, Circuit Judges.

Author: Per Curiam

Opinion OF THE COURT

New York Connecting Railroad Co. (Connecting) is a wholly-owned subsidiary of the debtor, Penn Central Transportation Co. (Penn Central). The Bank of New Jersey, the indenture trustee, holds a mortgage which is the first lien upon all of Connecting's property to secure an issue of outstanding and unpaid bonds.

In October 1965, Connecting, for the sum of $5,000, granted appellants, Harold and Irving Domnitch, an option for a term of two years and four months to purchase the air rights located 22 feet above certain railroad tracks in New York City. In December 1969, Connecting leased all of its properties to Penn Central for a term of ten years in consideration of rentals sufficient to service the indebtedness of the bonds secured by the mortgage. On June 21, 1970, Penn Central entered into reorganization under section 77 of the Bankruptcy Act. Although Penn Central's bankruptcy resulted in Connecting's default on the mortgage in October 1970, Connecting has not entered into the reorganization proceedings.

On November 16, 1970, Irving Domnitch, Connecting, and Penn Central executed a document designated as a "rider" to the 1965 option. The document provided that, for the additional sum of $20,000, Domnitch had exercised his rights under the option and that Connecting and Penn Central agreed to sell the designated air rights located higher than 22 feet above the railroad tracks. Closing was set for March 31, 1971, or within 30 days after notice to appellants of the approval of the sale by Connecting's Board of Directors, Penn Central's trustees, and "the Reorganization Court, as required by law."

Closing never occurred, and in November 1973, appellants instituted an action in the Supreme Court of the State of New York against Connecting and the indenture trustee to obtain specific performance of the 1970 sale agreement. The indenture trustee petitioned the reorganization court to enjoin appellants from continuing the New York action.

After a hearing, Judge Fullam found that Penn Central was in possession of the disputed air rights by virtue of its lease with Connecting. Concluding that he had jurisdiction over the dispute, he enjoined the continuation of the New York litigation as being inequitable to the indenture trustee. The Domnitches appeal; we affirm the judgment of the district court.

Appellants contend that the reorganization court lacked jurisdiction to enjoin the New York litigation. The reorganization court has "exclusive jurisdiction of the debtor and its property, wherever located . . . ." Bankruptcy Act § 77(a), 11 U.S.C. § 205(a) (1970). A debtor's property includes any leasehold estate; any controversy involving that estate is within the exclusive jurisdiction of the bankruptcy court. Callaway v. Benton, 336 U.S. 132, 69 S. Ct. 435, 93 L. Ed. 553 (1949). Thus, if the property leased by Connecting to Penn Central included the disputed air rights, the reorganization court had jurisdiction to enjoin the New York action.

The "Description of the Property Leased" to Penn Central included:

All of the right, title and interest of the New York Connecting Rail Road Company in and to all of its property, real, personal and mixed, including equipment, machinery, tools, materials and supplies, cash, securities, claims, intangibles, choses in action, rights (contractual or otherwise), obligations, interests, leaseholds, trackage rights, licenses and franchises, and including without limitation:

A. the railroad of the New York Connecting Rail Road Company . . . .

Connecting, as the owner of the fee, had ownership of the air rights. See United States v. Causby, 328 U.S. 256, 264, 90 L. Ed. 1206, 66 S. Ct. 1062 (1946). The lease of all its property would seem to include the lease of its air rights.

Appellants argue, however, that the "Description of the Property Leased" must be interpreted in light of the preamble to the lease which indicates that the parties entered into the lease so that Penn Central could use and operate the "lines of railroad and rights of way." The preamble demonstrates, it is argued, that only the property necessary for the use and operation of the railroad lines and rights of way by Penn Central was included in the lease. We do not agree that the purposes for which parties enter into a lease necessarily limit the property in actuality ...


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